Bank of America- Merrill Lynch sees FTSE 100 at 7,750 in 12 months

By Alexander Bueso

Date: Friday 28 Apr 2017

(ShareCast News) - Bank of America-Merrill Lynch thinks demand for commodities and the global cycle will push the FTSE 100 to 7,750 points in 12 months' time.Those two factors will drive earnings per share growth of 23% in 2017 (consensus: 21%), leaving last year's 5% drop in the dust. Their above consensus view is predicated on a higher than consensus forecast for the price of oil in 2017 of $61 a barrel.

With nearly a quarter of the FTSE 100 being commodity-related, they are the main reason for the broker's optimism.

"Global GDP and Developed Market survey data have historically been better lead indicators for FTSE 100 EPS growth than domestic data given ~70% sales are non-UK. Global momentum is strong and survey data is accelerating," the analysts say.

Positioning should help as well, the broker says, given how so many fund managers already hold a very bearish view on UK stocks versus their continental peers. Its analysts also point out how the Footsie is mainly levered towards the Eurozone, US and Emerging Markets.

In particular, they are telling clients to 'Overweight' FTSE 350 Energy and Basic Resource issues.

As for Basics, BofA-ML sees multiple factors which should buoy the space.

"Basics can outperform given improved balance sheets, significant FCF potential, underweight positioning, the recent pull back and gearing to another leg of the global reflation trade. Chinese macro is holding up too, despite nominal growth worries."

In more general terms, they point out how 70% of the Footsie's sales come from overseas.

Acting as a backdrop, a weak UK economy is expected to weigh on the more domestically-oriented sectors. On top of that, there are risks to M&A and Utilities if polls pointing to a decisive win for the Conservatives prove correct, the analysts add.

Nonetheless, as far as Retail is concerned they believe it is best to be 'Neutral' instead of 'Underweight' like the consensus because economic weakness is already priced-in.

"Retail seems to be alone in pricing a sharp economic contraction."

Instead, in their opinion investors will be better served by focusing on 'underweight' opportunities in other segments of the market exposed to the British consumer, such as Travel & Leisure, House Builders and domestic Banks.

A poor outlook for the British economy after Brexit also means the upside for Sterling is capped, the broker adds.

"We therefore expect any rallies in GBP not to be sustained. As a result, we do not subscribe to the view that we are set for a sharp reversal within UK equities favouring domestic over internationally exposed stocks. We believe investors should resist the temptation to flip the successful long internationally exposed/short domestic-exposed stocks trade round 360.

"Rather, we think now is a sensible time to become less binary and more currency-agnostic. Fundamentals will matter most for equities from here, in our view."